Herbalife Falls After Fund Manager Queries Disclosure

David Einhorn, president of Greenlight Capital Inc. Photographer: Jonathan Fickies/Bloomberg

May 2 (Bloomberg) -- Hedge-fund manager David Einhorn has
questioned Herbalife Ltd., a maker of nutritional and weight
loss supplements, about why it stopped providing information
about distributors in filings.

The shares had their biggest two-day drop since they began
trading in December 2004 after Einhorn, chairman of Greenlight
Capital Re Ltd., questioned executives on a conference call with
analysts and investors yesterday. Herbalife, which sells
vitamins, shake mixes and skin gels through a marketing network
of independent distributors in 81 countries, had gained 36
percent this year before May 1.

Einhorn asked why Herbalife had stopped disclosing a
breakdown of three groups of distributors in filings that it had
previously provided. He also asked for an explanation of
financial incentives given to supervisors who sign up new
distributors. The independent contractors earn revenue by
selling products directly to customers and recruiting new
distributors, for which they earn a share of those sales and
incentives from the company.

The shares dropped 6.4 percent to $52.70 at the close in
New York after plunging 20 percent yesterday.

Chief Financial Officer John DeSimone told Einhorn on the
call that when he took over as finance chief in January 2010 he
decided to stop breaking out information on distributor groups
as it isn’t “valuable information to the business or to the
investors.” Herbalife “can easily provide the exact same
breakout going forward,” DeSimone told Einhorn.

Short-Selling Lehman

“That sort of follow-up” would be “helpful,” Einhorn
said on the call, which followed the company’s report on its
first-quarter results.

Einhorn, known for short-selling Lehman Brothers Holdings
Inc. before the firm collapsed in 2008, has more recently put
pressure on companies such as Green Mountain Coffee Roasters
Inc., questioning its accounting disclosure in October.

Green Mountain fell the most in two months on Oct. 17 after
Einhorn called for improved disclosure and said the market for
its Keurig single-cup brewers is “limited.”

“The fact that recognized short seller David Einhorn asked
questions on the call put pressure on Herbalife’s stock price,”
the company said in a statement yesterday. “Mr. Einhorn’s
questions raised no new subjects or concerns,” it said. “Our
business fundamentals are very strong and we are confident in
our financials, our disclosures and our network marketing
business method.”

‘Excellent Quarter’

Einhorn declined to comment on Herbalife’s statement,
Jonathan Gasthalter, a spokesman for Greenlight, said by
telephone yesterday.

“Herbalife shares are down hard,” after Einhorn
questioned Herbalife’s disclosure, Tim Ramey, an analyst at D.A.
Davidson & Co., said in a note to clients yesterday. “This was
an excellent quarter from an excellent company with high ethics
and strong accounting.”

The company said on April 30 that net income in the first
quarter increased 23 percent to $108.2 million as revenue
advanced 21 percent to $964.2 million. It raised its full-year
guidance to a range of $3.58 to $3.74 from an earlier forecast
of $3.40 to $3.60.